Gold not to lose luster; could hit $2,000 by end-2012

Gold prices will keep rising over the next two years to hit $1,600 per ounce by the end of 2011 and $2,000 by end of 2012, as fresh shocks to the global financial system are expected, an analyst has said.

Capital Economics analyst Julian Jessop also said the ratio of gold to oil prices, which is currently 15 with gold at $1,382 per ounce and Brent crude at $92 per barrel, will more than double in the next two years.

.. the price of gold should continue to be supported by demand for a safe haven from other potential economic and financial shocks. Front-runners include the risks of a US-China trade war and some form of EMU break-up, Jessop wrote in a note on Tuesday.

He says even if the eurozone managed to avert eventual crumbling down, the continuing financial crisis in Europe will keep investors nervous. Also, Japan's long-term fiscal problems will finally come to a head in the next year or two, dealing another blow to global recovery.

Jessop says apart from weather, commodity prices have recently been boosted by two factors - hopes that the global recovery is gathering pace, and lingering fears that ultra-loose monetary and fiscal policy in the US will trigger runaway inflation and a collapse in the dollar.

However, hopes that global recovery is steady are only partially founded on reality. New fiscal stimulus measures could lift US GDP growth to 3 percent in 2011, but this is unlikely to prompt a sustained pick-up in private sector demand and unemployment will remain high, depressing GDP growth to 2 percent in 2012.

He points out that a severe fiscal squeeze is looming in Europe and that there is little evidence that the Chinese economy is becoming any more balanced. Meanwhile he doesn’t expect that inflation fears will dent the gold rally either. ... inflation fears are completely overdone ... while the dollar is increasingly likely to be seen as the best of a bad bunch among the major currencies.

Jessop also points out that gold prices haven’t shot up unrealistically high. ... gold is still not particularly expensive relative to other commodities or its own history.

He says the ratio of gold to oil prices will more than double in the next two years. Our forecasts for gold and oil prices suggest this ratio could more than double in the next two years, but in conditions that would justify a substantial premium for the precious metal.